Abstract

We posit that feeling constrained impedes happiness. Under this view, utility and happiness maximization yield the same optimal choices in a variety of standard economic decision problems, but utility and happiness can move in opposite directions in response to exogenous shocks. Our theory (i) respects economists' and psychologists' notions of utility and happiness; (ii) captures why the two concepts are often confused; (iii) explains the Easterlin Paradox and hedonic adaptation without resorting to systematically poor choices; and (iv) offers a novel interpretation of previous empirical findings in which individuals' choices go hand-in-hand with lower happiness.